Ken Frankel, Managing Member

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Will the economy double dip?

I have been saying for some time the meteoric rise in the stock market since March 2009 was not justified. In certain sectors it was justified like financials which were no longer facing the abyss. But the 100% move in some retail stocks anticipating a V shape recovery was fanciful. Most people failed to understand how different this slowdown was from the last deep one in the early 1980′s which we did have a sharp recovery from including that interest rates were dropping from very high levels then, they were not already low and heading for deflationary levels, like they are now.

There was a column just published in US News and World Report which I though offered an excellent explanation of what is going on:

I still don’t see an actual double dip even if we double dip in residential housing which is quite possible. If commercial real estate cracks as was widely expected but has not been as bad as feared, that could be something else. Double Dip is a technical term, it means two consecutive quarters of negative growth as opposed to just running in place – each represents a slow economy, but one is technically a recession and one is not. Some early earnings reports from companies like Oracle (because they have a non traditional fiscal year) have been pretty good. I think the earnings and the guidance will be pretty mixed from companies which would indicate a sluggish economy but not a recessionary one.

The amount of “stimulus” money that went to non-stimulus activities is truly a big problem. There is no support in Congress for a second wave of it as the first wave has failed to produce jobs. I want to clarify something that has been nationally debated. Keeping teachers and firefighters employed while laudable and while it keeps the economy more stable is not stimulus. Let me use this analogy – there is a difference keeping someone alive on a heart-lung machine than restarting their heart with defibrillation paddles where in the latter, their own heart starts beating on its own. That is the difference between paying public sector salaries and building bridges and infrastructure, because the infrastructure spending takes on a life of its own and leads to other economic activity that does not require government spending. Also much of the cost of the spending could have been used for deeper tax cuts which would give consumers a PERMANENT and SUSTAINABLE source of higher disposable income, but that didn’t happen and going forward taxes are going up on people with the most disposable income, which is not good for the economy.